24 June, 2011

HIRE PURCHASE UNDER SHIRKATUL MELK (IJARA MUNTAHIA BITTAMLIK)

Hire Purchase under Shirkatul Melk is a special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:

1.Shirkat

2.Ijarah and

3.Sale

These may be defined as follows:

SHIRKATUL MELK:

Shirkat means partnership, Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear their loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.

IJARAH:

The term Ijarah has been derived from the Arabic words (Ajr) and (Ujrat) which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an ASSET. Ijarah has been defined as a contract between two parties, the Lessor and the Lessee where the Lessee enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Lessor. It is a hire agreement under which a certain asset is hired out by the Lessor to a Lessee against fixed rent or rentals for a specified period.

SALE:

This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid/ to be paid by their buyer.

Thus, in Hire Purchase under Shirkatul Melk mode both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports etc. Purchase the asset with that equity money, own the same jointly; share the benefit as per agreement and bear the loss as proportion to their respective equity. The share, part or portion of the asset owned by the Bank is hired out to the Client (partner) for a fixed rent per unit of time for a fixed period. Lastly the Bank sells and transfers the ownership of its share/part/portion to the Client against payment of price fixed for that part either gradually part or in lump-sump within the hire period or after the expiry of the hire agreement.

IMPORTANT FEATURES:

In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is jointly purchased by the Lessor (Bank) and the Lessee (Client) with specified equity participation under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner(Lessor Bank & Lessee Client) are clearly mentioned. Under this agreement, the Lessor becomes co-owner of the asset under transaction in proportion to their respective equity participation. In Hire Purchase under Shirkatul Melk agreement, the exact ownership of both the Lessor (Bank) and Lessee (Client) must be recognized. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. The share/part of the purchased asset owned by the Lessor (Bank) is put at the disposal/possession of the Lessee (Client) keeping the ownership with him (Bank) for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are also to be clearly stated. Under this agreement, the Lessee (Client) becomes the owner of the benefit of the asset but not of the asset itself, in accordance with the specific provisions of the contract vide which the Lessor (Bank) is entitled for the rentals.

The ownership of hired portion of the asset lies with the Lessor (Bank) and rent is paid by the Lessee (Client) against the specific benefit, the rent is not considered as price or part of price of the asset. In the Hire Purchase under Shirkatul Melk agreement the Lessor (Bank) does not sell or the Lessee (Client) does not purchase the asset but the Lessor (Bank) promise to sell the asset to the Lessee (Client) part by part only, if the Lessee (Client) pays the cost price/equity/ agreed price as fixed for the asset as per stipulations within agreed period on which the Lessee also gives undertakings. The promise to transfer legal title by the Lessor and undertaking given by the Lessee to purchase ownership of the hired asset upon payment part by part as per stipulations. As soon as any part of Lessor’s (Bank) ownership of the asset is transferred to the Lessee (Client) that becomes the property of the Lessee and hire contract for that share/part and entitlement for rent thereof lapses.

In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is affected from the day the equity of both parties deposited and the asset is purchased and continues up-to the day the equity of both parties deposited and the asset is purchased and continues upto the day on which the full title of Lessor (Bank) is transferred to the Lessee (Client). Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Lessor to the Lessee. It is sold and transferred part by part and with the sale and transfer of ownership of every share/part, the hire contract of that share/part will lapse and the rent will be reduced proportionately. At the end of the hire period when the full title of the asset will be sold out and transferred to the Lessee (Client), the Lessee will become the owner of both the benefit and the asset consequently the hire contract will fully end. Hire Purchase under Shirkatul Melk is a binding contract of the parties to it- the Bank and the Client who are committed to fulfill/meet their undertaking/obligations in accordance with the relevant agreement. Under this agreement the Bank acts as a partner, as a Lessor and at last as a seller; on the other hand the Client acts as a partner, as a Lessee and lastly as a purchaser. Ownership risk is borne by both the Lessor and Lessee in proportion to their retained ownership/equity.

Under this agreement the role of Lessee is one that of a trustee, the hired asset being a trust property in his hands; he will manage, maintain the asset in favor of the interest of the Lessor at his own cost as the exact subject of hirer except in cases of any accident due to any event entirely beyond control of the Lessee and natural calamity/ disaster (acts of Allah) to be determined by the Bank after proper investigation within the knowledge of the hirer. The Lessee is responsible for keeping the hired asset(s) in good condition throughout the whole period of hire and if the asset is damaged or destroyed due to mismanagement, corruption, negligence, transgressions, default etc. of the Lessee. He shall be responsible to compensate the Lessor (Bank) for that. Of course, such mismanagement, corruption, negligence, transgressions, default etc. of the Lessee shall be determined by the Lessor (Bank) after proper investigation within the knowledge of the lessee. The Lessee cannot, without obtaining prior written of the Lessor (Bank) make any change in the exact item of the hire, and/or remove it from its place of installation and transfer it to another location.

In a Hire Purchase under Shirkatul Melk agreement any stipulation may be made, provided it is not against the nature and requirements of the contract itself, nor does it violate the divine laws of Islam and is also acceptable to both the parties. Hire Purchase under Shirkatul Melk facilities may be for medium-term or long-term period which may be utilized for the expansion of production and services, as well as housing activities. The duration of Hire Purchase under Shirkatul Melk contract shall not exceed the useful life of the subject/asset of the transaction. The Bank should not normally enter a Hire Purchase under Shirkatul Melk transaction for items with useful life of less than two years. Hire Purchase under Shirkatul Melk transaction facilities the Client (Lessee) to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part. If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Lessee, then the title of the asset will be shared by both Lessor and Lessee- the Lessee will share that part of title which has been transferred to him against payment and the Lessor will share the remaining part. The Hire, to secure the Bank (Lessor) will pledge/hypothecate/mortgage his portion/part/share in the asset (acquired/to be acquired) and or any other asset/property of his own/third party guarantor to the Bank to fulfill his all liabilities/commitments including the accrued rental, if any.